MINOR INVESTOR: The list of the 14 best income UK funds that yields an average of 5.6% – and why reliable and growing dividends matter

Dividends may not be raciest element of the investing world but when it comes to long-term returns they are among the most reliable.

The Barclays Equity Gilt study shows £100 invested in the UK stock market in 1899 would have been worth £16,004 by 2017 – but would have reached £2,635,984 with dividends taken into account and reinvested.

The tricky part for investors is navigating their way through the stock market and spotting the companies that can deliver over time – or the fund managers who are good at unearthing them.

If you can find an investment that pays out dividends as reliable as clockwork then the returns will build up over time

For the latter, there are a few handy reports that come out each year and the latest edition of one of them Sanlam’s White List has just landed.

It looks at total income, capital growth and volatility over the past five years in an attempt to name the best prospects for investors. The top 14 fund on it have an average yield of 5.6 per cent.

Sanlam names Troy Trojan Income, Axa Framlington Monthly Income and Miton UK Multi Cap as its top three UK income funds.

The Sanlam study is worth a look for some pointers, but there is, of course, the question of why would you even use a fund manager?

Plenty of investors choose to research and buy individual shares themselves, but the reality is that many people don’t have the time to do that properly.

For those who would rather outsource the hard work to someone whose job it is and has greater resources to do it, a fund or investment trust is a wise move.

You could pick a tracker that simply follows the stock market and picks up the dividends along the way – the broad UK stock market index, the FTSE All-Share, currently yields a chunky 4.29 per cent.

However, that does mean relying heavily on a fairly limited number of companies to do the dividend heavy lifting – and these tend to be big, mature firms with limited opportunities for growth, such as Shell, BP, HSBC and GlaxoSmithKline.

Alternatively, you could find a fund or investment trust manager who goes looking for dividend prospects among smaller and medium-sized companies with headroom to grow.

This is something that is well worth bearing in mind when weighing up funds or investment trusts and Sam Lees, at Fund Expert argues that ‘the consistency of growth in the income a fund pays out’ is as important as any of the measures in the Sanlam study.

This is one of the reasons why I favour funds and particularly investment trusts that look for dividends lower down the company scale than among the giants of the FTSE 100.

SANLAM’S WHITE LIST OF THE 14 BEST UK INCOME FUNDS

Rank

Group/Investment

Gross Yield

Total dividend income over five years

2018 return

2017 return

2016 return

2015 return

2014 return

1

Troy Trojan Income I Inc

4.4

30.3

-7.6

5.7

9.7

10.2

9.4

2

AXA Framlington Monthly Income R GBP Inc

4.9

22.9

-10.2

16.0

9.7

4.1

6.6

3

LF Miton UK Multi Cap Inc A Inc Retl

4.8

21.7

-8.4

14.8

2.4

18.0

3.5

4

Franklin UK Equity Income A Inc

4.8

22.1

-9.8

10.9

14.3

4.7

6.1

5

Artemis Income R Inc

4.8

24.8

-10.5

11.8

9.7

4.4

3.5

6

FP Miton Income A Inc

5.4

27.4

-11.0

9.6

7.2

10.9

4.2

7

Man GLG UK Income Retail Inc B

4.6

22.9

-8.1

26.8

4.8

11.9

3.1

8

Fidelity MoneyBuilder Dividend

5.3

24.8

-9.9

4.5

6.7

7.1

6.9

9

Santander Equity Income RI

5.5

25.8

-10.9

11.0

4.9

12.5

4.8

10

Royal London UK Equity Income A

4.8

21.6

-10.2

12.1

10.3

4.8

6.3

10

Santander Enhanced Income Port RI

7.0

32.2

-11.5

12.8

3.9

8.4

2.8

12

Insight Equity Income Booster GBP Inc

8.8

45.9

-12.0

10.9

14.4

-1.4

1.8

13

RBS Equity Income 1 Inc

4.9

23.2

-11.5

11.7

10.1

6.2

2.0

14

Fidelity Enhanced Income Inc

7.8

42.3

-9.5

4.3

3.5

5.0

4.3

Source: Sanlam February 2019

What’s also important is avoiding the dividend traps.

These are the companies that look like they pack a hefty payout, but only have a big eye-catching yield due to a collapse in their share price – and a dividend cut or worse is on the way.

In my early days of investing, my first experience of a dividend trap was HMV. I was lured into its shares by an 8 per cent yield, thinking that as the last remaining music store on the High Street the firm couldn’t possible fail. I was wrong and it went bust (and recently did so again).

I imagine there were more than a few income fund managers who also made that HMV mistake, but the advantage of a fund or trust is that your money is spread around, so at least you are not too heavily affected by such a collapse.

Investing for income through an investment trust carries an extra advantage too, they are able to hold over some of their payouts in the good years to help cover the bad.

This is why among the AIC’s dividend hero list of investment trusts with the longest history of increasing dividends year in, year out there are some that have racked up 52 years and counting, such as City of London, which currently yields 4.5 per cent.

How to start investing or be a smarter investor

Investing has proven to be the best way to beat inflation and grow your wealth over the long-term, but how do you get started?

And if you do already invest but feel you’ve lost track of your goals or ended up with a jumble of investments, how can you improve things?

In this podcast, Simon Lambert and Georgie Frost dive into how to be a smarter investor.

They bust the jargon and look at why people should invest, how to get started, what investments you can choose and how to find the right ones for you.